Extended Annual Review Report

Project Number: 48325-001 Loan Number: 3246 October 2019

EDC Burgos Wind Power Corporation 150-Megawatt Burgos Wind Farm Project (Philippines) This is an abbreviated version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy .

CURRENCY EQUIVALENTS Currency Units – peso (₱)

At Appraisal At Project Review

(8 September 2014) (31 May 2019) P1.00 $1.00

– –

$0.0229 ₱43.58

$0.0192 ₱52.07

ABBREVIATIONS

ADB COE DOE EBWPC EDC

– – – – –

Asian Development Bank Certificate of Eligibility Department of Energy EDC Burgos Wind Power Corporation Energy Development Corporation

EIRR ERC

– –

economic internal rate of return Energy Regulatory Commission

FIRR FIT FIT-All GHG GWh IEE kWh kV MW O&M

– – – – – – – – – –

financial internal rate of return feed-in-tariff FIT Allowance greenhouse gas gigawatt-hour initial environmental examination kilowatt-hour kilovolt megawatt operation and maintenance

OHSAS – occupational health and safety advisory services RRP

Transco – –

report and recommendation of the President National Transmission Corporation

NOTES (i) The fiscal year (FY) of EDC Burgos Wind Power Corporation ends on 31 December.

FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2019 ends on 31 December 2019.

(ii) In this report, "$" refers to US dollars.

Vice-President Diwakar Gupta, Private Sector Operations and Public–Private Partnerships

Director General Michael Barrow, Private Sector Operations Department (PSOD) Senior Advisor/ Officer-in-charge

Craig Roberts, Private Sector Operations Department/ Portfolio Management Division

Team leader Sergey Mokroussov, Investment Specialist, PSOD Team members Kristy Harrison, Senior Safeguards Specialist, PSOD

Manfred Kiefer, Senior Economist, PSOD Jose Limjap (Consultant), PSOD Jocelyn Munsayac, Principal Safeguards Specialist, PSOD Siela Teng-Almocera, Social Development Officer (Safeguards), PSOD Russ Toribio, Associate Investment Officer, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 3

II. EVALUATION 5

A. Project Rationale and Objectives 5 B. Development Impact 5 C. ADB Additionality 7 D. ADB Investment Profitability 7 E. ADB Work Quality 7

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 8

A. Issues and Lessons 8 B. Recommendations and Follow-Up Actions 9

APPENDIXES 1. Project-Related Data 10 2. Results and Ratings for Project Contributions to Private Sector Development and ADB

Strategic Development Objectives—Infrastructure 11 3. Sector Review 15 4. Environmental Impact 17 5. Social Impact 22

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BASIC DATA EDC Burgos Wind Power Corporation

150-Megawatt Burgos Wind Farm Project (LN3246-Philippines)

Key Project Data

As per ADB Loan Documents

($ million) Actual

($ million)

Total Project Cost ADB Investment:

Loan: Committed Disbursed Outstanding

461.1

20.0

450.0

19.6 19.6 16.9

ADB = Asian Development Bank.

Key Dates Expected Actual

Concept Clearance Approval Fact-Finding Missions Board Approval Execution of Term Loan Agreement Loan Effectiveness First Disbursement

28 Jul 2014 4 Aug 2014

7-9 Aug 2014 26 Jan 2015 10 Nov 2015 10 Nov 2015 15 Dec 2015

28 Jul 2014 4 Aug 2014

7-9 Aug 2014 26 Jan 2015 10 Nov 2015 10 Nov 2015 15 Dec 2015

Project Administration and Monitoring Number of Missions Number of Person-

Days

Due Diligence and Appraisal XARR Mission

2 1

10 15

EXECUTIVE SUMMARY

On 26 January 2015, the Asian Development Bank (ADB) approved a $20 million senior secured term loan to EDC Burgos Wind Power Corporation (EBWPC) for the 150-Megawatt (MW) Burgos Wind Farm Project. EBWPC is a wholly owned subsidiary of Energy Development Corporation (EDC). The ADB financing is part of a $315.0 million syndicated debt facility arranged to refinance the development and construction cost of the project. ADB committed $19.6 million to the project financing. The project consisted of (i) the installation of 50 3.0 MW wind turbine generators and ancillary plant equipment, (ii) the construction of a 43 kilometer 115 kV transmission line, and (iii) the construction of a substation in Burgos and expansion of an existing substation in Laoag, Ilocos Norte. The total project cost was $450.0 million. When the Renewable Energy Act was passed in 2008, one of the incentives was the provision of a fixed tariff under a feed-in-tariff (FIT) system for renewable energy projects. However, the Energy Regulatory Commission (ERC) only announced the FIT rates and installation targets for each type of renewable energy source on 27 July 2012. A tariff of P8.53/kilowatt-hour (kWh) was set for wind power, with an initial installation target of 200 MW. The ERC subsequently released the FIT eligibility guidelines on 28 May 2013, which prescribed a “first come first served” basis for the allocation of FIT eligibility, subject to 80% completion and successful commissioning. The resulting uncertainty concerning FIT eligibility deterred financial institutions from financing renewable energy projects. As a result, renewable energy developers, including EBWPC, had to finance construction of the projects using their balance sheet, with the intention of refinancing their projects on a project finance basis once the FIT eligibility allocation had been granted. The project started commercial operations on 11 November 2014, the same day its Certificate of Endorsement (COE) for the FIT was issued. The project locked in a FIT rate of ₱8.53/kWh for 20 years until 10 November 2034. The project’s operating and financial performance through 2018 has exceeded the projections given in the report and recommendation of the President. Actual net power generation was 320.3 gigawatt-hours (GWh) in 2016, 372.5 GWh in 2017, and 376.0 GWh in 2018, exceeding the RRP projection of 289.2 GWh, based on a conservative P90 wind resource forecast.1 Profit margins are stable and operating cash flows are sufficient to cover debt service payments. FIT implementation issues, however, caused EBWPC’s receivables from Transco to increase to a high of $34.5 million (200 days receivable) in 2017. The FIT Allowance (FIT-All) fund, managed by Transco, did not have enough funds to cover all FIT rate payments. The FIT-All rate charged to all electricity consumers was initially pegged at ₱0.04/kWh for 18 months. The rate was too low, given that eligible total renewable energy capacity installed had almost doubled from the installation target of 750 MW to 1,400 MW, and that the differential between the FIT rate and spot rate had widened because of a lower than anticipated spot rate. The FIT-All rate was eventually adjusted to ₱0.1240/kWh effective April 2016 and now stands at ₱0.2226/kWh for 2019. With the higher FIT-All rate, Transco has managed to pay all overdue FIT allowances. Transco estimates that at ₱0.2226/kWh, the fund will still be able to service all payables. The fund currently has a surplus of ₱1.0 billion. As of March 2019, the EBWPC collects its revenues on time and is now aligned with the two-month billing and collection cycle. EBWPC’s receivables from Transco dropped to around $10.0 million (60 days receivable) in the first quarter of 2019.

1 P90 means there is a 90% probability of the wind resource forecast being exceeded each year.

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The ERC has yet to approve a FIT rate increase indexed to foreign exchange and inflation rate increases as provided for under the FIT rules. The delay was due to a change of commissioners in 2017 and a review of the methodology approved under the FIT Rules. The estimated rate recommended by Transco for 2019 is ₱9.9808/kWh and ₱10.1887/kWh for 2020. ERC has started the process of discussing the FIT rate escalation methodology with stakeholders prior to presentation to the commissioners. The incremental rate is expected to be confirmed in 2020. The project supported government efforts to increase the country’s portfolio of renewable energy generating capacity; total wind power installed capacity has reached 427 MW. EBWPC is proactively managing the environmental and social risks of the project. The institutional systems, capacity, and commitment of EBWPC to manage the environmental and social impacts are deemed adequate. The project’s operation from 2015 to 2018 has delivered 1,321.5 GWh of electricity to the grid and this translates to around 894,000 tons of carbon dioxide (CO2) equivalent emissions avoided.

Given favorable weather conditions, the project has demonstrated strong overall operating and financial performance through 2018, despite the absence of any FIT rate increase. EBWPC’s operations through 2018 have demonstrated strong margins, cash flow generation, and liquidity despite the rise in FIT receivables from Transco. ADB has provided guidance to EDC and EBWPC on the environment and social safeguards even when the project was still in the development stage. ADB’s participation also helped bridge the project’s financing gap. The deal team also worked with EDC and other potential lenders in crafting the financing terms. The deal team closely monitors EBWPC’s operating and financial performance through regular communication and follow-up on the timely submission of reports and financial statements and has also met with both the ERC and Transco to convey ADB’s concerns and get an update on the FIT implementation issues.

I. THE PROJECT

A. Project Background

1. On 26 January 2015, the Asian Development Bank (ADB) approved a $20 million senior secured term loan to EDC Burgos Wind Power Corporation (EBWPC) for the 150-Megawatt Burgos Wind Farm Project. EBWPC is a special-purpose vehicle incorporated in the Republic of the Philippines on 13 April 2010 specifically to develop, construct, operate, and maintain a 150 MW grid-connected wind power plant in Burgos, Ilocos Norte, Philippines. It is a wholly owned subsidiary of Energy Development Corporation (EDC).1 The ADB financing is part of a $315 million syndicated debt facility arranged to refinance the development and construction cost of the project. 2. In December 2008, the Renewable Energy Act was signed into law to promote the development of emerging renewable energy, namely from wind, solar, biomass, and ocean sources. Its goal was to promote energy self-reliance and reduce the country’s dependence on imported fossil fuels for power generation. Based on the Department of Energy (DOE) estimates, the Philippines has untapped renewable energy potential of about 250,000 MW, and the DOE targets to achieve about 2,870 MW of additional installed capacity from these emerging sources by 2030.2 Under the Renewable Energy Act, emerging renewable energy projects will benefit from (i) fiscal incentives like a 7-year income tax holiday and duty free importation of capital equipment, (ii) priority connection to the transmission and distribution systems, (iii) priority purchase and transmission of, and payment for, electricity sold through the grid, and (iv) a fixed tariff under a feed-in tariff (FIT) system. 3. Notwithstanding the passage of the Renewable Energy Act in 2008, no significant investments in renewable energy plants ensued because of the delay in the implementation of the FIT scheme. The Energy Regulatory Commission (ERC) only announced the FIT rates and installation targets for each type of renewable energy source on 27 July 2012. A tariff of ₱8.53/kWh was set for wind power, with an initial installation target of 200 MW. The ERC subsequently released the FIT eligibility guidelines on 28 May 2013, which prescribed a “first come first served” basis for the allocation of FIT eligibility.3 The FIT eligibility policy is meant to weed out speculators from serious power developers. However, the uncertainty of FIT eligibility also deterred financial institutions from committing to finance renewable energy projects. As a result, renewable energy developers, including EBWPC, financed construction of the projects using their balance sheet, with the intention of refinancing their projects on a project finance basis once the FIT eligibility allocation had been granted.

1 EDC is the largest geothermal energy producer in the country and the second largest integrated steam and

geothermal energy producer in the world. The company operates 11 company- and subsidiary-owned geothermal power plants with an aggregate installed capacity of 1,129.4 MW. EDC holds 2 wind service contracts in the Philippines for the development of wind farm projects in Burgos and Pagudpud, Ilocos Norte. EDC is indirectly owned by First Philippine Holdings, a diversified local conglomerate with interests in power generation, power distribution, broadcasting, telecommunications, and manufacturing.

2 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to EDC Burgos Wind Power Corporation for the 150 MW Burgos Wind Farm Project (Philippines). Manila.

3 The guidelines indicate that a renewable energy developer can only initiate the process for FIT eligibility once its project has achieved electromechanical completion (project is at least 80% complete). The DOE, however, will only issue a Certificate of Endorsement (COE) for FIT eligibility to ERC after it validates that the project has reached successful commissioning. The DOE will continue to issue the COE until the maximum installation target for each renewable energy technology is fully subscribed. The COE will indicate the installed capacity that will be eligible for the FIT rate and the actual date of commercial operation.

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4. EDC first approached ADB after the passage of the Renewable Energy Act. The deal team discussed ADB’s requirements, especially with respect to the environment and social safeguards. ADB chose to support EBWPC’s refinancing initiative for the following reasons: (i) the project was developed by a strong sponsor with a successful track record of developing, financing, constructing, owning, and operating power generation projects in the Philippines; (ii) based on the wind mapping done by the United States National Renewable Energy Laboratory, the sites with the greatest potential for wind energy generation in the Philippines included the Ilocos region where the project was located; (iii) the project would contribute to the diversification of the fuel mix of the Luzon grid, which relied heavily on imported fossil fuels; and (iv) the project would avoid an increase in greenhouse gas emissions as it would reduce the supply of power generated from coal-fired power plants. B. Key Project Features

5. The project consisted of the (i) installation of 50 3.0 MW wind turbine generators supplied by Vestas Wind Systems A/S (Vestas)4 and ancillary plant equipment, (ii) construction of a 43-kilometer, 115-kilovolt (kV) transmission line, and (iii) construction of a substation in Burgos and the expansion of an existing substation in Laoag, Ilocos Norte. Total project cost was $450.0 million (Appendix 1, Table A1.3). Commercial operations started on 11 November 2014 after completion of the transmission line on 15 October 2014. EBWPC signed a 10-year operation and maintenance (O&M) contract with Vestas with a guaranteed availability factor; while the contract is until 2024, it is renewable. The transmission line is maintained by First Balfour, another subsidiary of EDC, under a 5-year contract until 2020 but also renewable. The COE for the project was issued on 11 November 2014. The ERC granted the FIT Certificate of Compliance on 13 April 2015; this specifies that the project is entitled to the FIT rate of ₱8.53, subject to escalations as approved by the ERC, from 11 November 2014 to 10 November 2034. The project was the first wind farm project to receive FIT eligibility and locked in a FIT rate of ₱8.53/kWh for 20 years until 2034. EBWPC elected to sell its generated electrical output through the Wholesale Electricity Spot Market, subject to the must-dispatch provisions of the Renewable Energy Act, with the National Transmission Corporation (Transco) as off-taker. 6. On 17 October 2014, EBWPC executed the following facilities to refinance the project: (i) an Export Credit Agency (ECA) Debt Facility up to $150.0 million with an 80% comprehensive guaranty, provided by the Danish ECA, Eksport Kredit Fonden; (ii) a $37.5 million USD Commercial Debt Facility; and (iii) a $127.5 million equivalent Peso Commercial Debt Facility but not to exceed ₱6.0 billion. The final maturity date of the facilities is 15 December 2029. EDC provides a comprehensive debt service guarantee that is expected to fall away in 2022 when the conditions for release, including completion of the land registration process, are expected to be satisfied. The facilities were fully drawn down on 15 June 2015. EBWPC executed seven interest rate swaps with an aggregate notional amount of $181.25 million to partially hedge the interest rate risks on the USD-denominated facilities. 7. ADB intended to participate in the financing at the same time as all the commercial lenders and Eksport Kredit Fonden. This would have allowed ADB to earn both the front-end fee and commitment fee as contemplated in the term sheet. However, ADB could not obtain final

4 Vestas Wind Systems A/S, incorporated in Denmark in 1945, is the global leader in the design, manufacture,

installation and service of wind turbines. With 105 GW of installed wind turbines in 80 countries, Vestas leads with more than 17% share of worldwide installed wind capacity of approximately 591 GW.

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investment committee and Board approval until EDC had approved the disclosure of the safeguard documents on the ADB website. EDC was hesitant to disclose the safeguard documents until they had been awarded the FIT eligibility certification by the government. The safeguard documents contained important information about the project, which EDC was not comfortable disclosing until they had received the certification as FIT eligibility was limited and competition to secure FIT eligibility certification was very tight. FIT eligibility was eventually awarded to the project in November 2014 and ADB subsequently posted the required documents. The deal team secured the concurrence of the banks participating in both the ECA and USD Commercial Debt Facilities to sell down their commitments on a pro rata basis to ADB. Although Board approval for ADB’s participation in the financing was obtained on 26 January 2015, ADB only executed the Accession Agreements with the other lenders on 10 November 2015 and disbursed $19.6 million on 15 December 2015. ADB’s participation consisted of $17.94 million under the ECA Debt Facility and $1.66 million under the USD Commercial Debt Facility. ADB’s participation was further delayed because certain lenders entered into cross-currency swaps to hedge their exposure and they had to wait for the swaps to terminate since the unwinding cost was prohibitive. C. Progress Highlights

8. The project’s operating performance from 2015 to 2018 approximates the results of the P50 base case financial model submitted by EBWPC to the banks.5 Actual net power generation of 320.3 gigawatt hours (GWh) in 2016, 372.5 GWh in 2017, and 376.0 GWh in 2018 compare favorably with the projected P50 average annual net generation of 360.7 GWh throughout the forecast period. Only in 2015 did the plant’s power output of 252.7 GWh fail to reach the desired level. This was because the project operated on a de-rated capacity from November 2014 until the end of September 2015 because of transmission line congestion in the Luzon grid. The congestion was resolved in September 2015 when the National Grid Corporation of the Philippines energized the 230 kV San Esteban-Laoag transmission line; no curtailment in output has been experienced by the project since then. On average, however, the wind resource available for generation in 2015 was recorded at 303 GWh. The availability factor from 2016–2018 exceeded the availability guaranteed by Vestas under the O&M agreement. 9. EBWPC’s financial performance from 2016 to 2018 is also favorable compared to the conservative RRP projections (Table 1). Actual profit margins and operating cash flows exceed RRP projections, notwithstanding the latter assuming that FIT rate escalation would start in 2016. A major concern, potentially affecting EBWPC’s liquidity, has been ERC’s failure to confirm the annual FIT rate escalation to be paid to eligible renewable energy operators since 2016, as provided for under the FIT Rules (2010), and ERC’s slow process in approving annual increases in the FIT-Allowance (FIT-All), a universal charge levied on all power consumers by distribution utilities and remitted the 15th of every month to Transco, which manages the FIT-All fund. Transco sources the FIT rate payments due on the 5th of every month to all FIT eligible renewable energy operators from the FIT-All fund. The FIT-All fund is composed of proceeds from the collection of the FIT-All from end-users to cover the FIT shortfall between the guaranteed FIT and the spot market.

5 P50 means there is only a 50% probability of the wind resource forecast being exceeded each year.

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Table 1. Projected vs Actual Financial Performance6 (in USD 000)

2015 2016 2017 2018

Actual RRP Actual RRP Actual RRP Actual RRP

Revenues 51,745 51,723 56,661 58,735 63,000 59,299 61,197 59,873

EBITDA 39,647 39,524 42,881 44,428 48,623 44,973 48,034 45,543

EBITDA Margin 76.6% 76.4% 75.7% 75.6% 77.2% 75.8% 78.5% 76.1%

Net Profit (868) (4,090) 12,146 298 17,218 (1,330) 19,081 6,121

Net Profit Margin (1.7%) (7.9%) 21.4% 0.5% 27.3% (2.2%) 31.2% 10.2%

Cash from Operations

36,215 11,442 19,917 22,732 38,123 21,133 61,542 28,090

Cash 14,507 10,433 8,388 27,100 18,466 47,252 20,953 57,482

Trade Receivables 22,673 938 31,667 9,943 34,465 10,039 20,337 10,136

Days Receivable 160 7 204 62 200 62 121 62

Total Debt 291,379 305,346 272,595 289,953 261,125 276,690 241,590 259,136

Debt Service 21,615 23,667 30,178 31,834 26,259 28,967 28,987 32,384

Equity 118,953 128,131 134,861 126,300 151,870 122,886 140,284 125,725

DSCR* 1.7x 0.5x 0.7x 0.7x 1.4x 0.7x 2.1x 0.9x

Debt/Equity Ratio 2.4x 2.4x 2.0x 2.3x 1.7x 2.2x 1.7x 2.1x *Debt Service Cover Ratio

10. When the FIT scheme was implemented in 2014, the FIT-All rate approved by ERC was only ₱0.04/kWh because of concern that there would be a public outcry, and this rate remained in effect until April 2016. In addition to this low rate, FIT eligible renewable energy power projects were higher than anticipated (target of 750 MW of renewable capacity vs actual renewable capacity of 1,400 MW) and electricity spot prices were lower than anticipated, which widened the differential between the spot price and the FIT rate to be paid by Transco. All these factors combined resulted in insufficient funds in the FIT-All fund. In calculating the recommended FIT-All rate, Transco uses the average spot rate for the past 36 months. The market price of electricity, however, has declined since 2014, thus resulting in a higher estimated spot rate and underestimation of the recommended FIT-All rate. 7 Consequently, Transco was unable to settle on time its obligations to FIT eligible operators and had to pay penalty interest for the delayed payments. To address the issue, ERC adjusted the FIT-All rate to ₱0.1240/kWh effective April 2016, ₱0.1830/kWh in May 2017, and ₱0.2563/kWh in June 2018. With the higher FIT-All rate collected in 2018, Transco managed to pay all overdue FIT allowances to the renewable energy operators including interest. Transco estimates that, even at ₱0.2226/kWh, the FIT-All rate effective April 2019, the fund will still be able to service all payables.8 The fund currently has a surplus of ₱1.0 billion. 11. The FIT implementation issues caused EBWPC’s receivables from Transco to balloon to $34.5 million--equivalent to 200 days receivable—in 2017 and caused concern about a potential strain on EBWPC’s liquidity. The liquidity issue was underscored in 2016 when

6 In 2016, EBWPC started using the USD as its functional currency and financial statements are reported in USD.

The company effected the change in functional currency after the finalization of its financing scheme and determined that the USD is the currency that mainly influences its operating expenses and financing activities. In accordance with Philippine Accounting Standards (PAS) 21, The Effects of Changes in Foreign Exchange Rates, the effect of the change in functional currency was accounted for prospectively. The change in functional currency resulted in an $8.4 million exchange difference, which was presented as part of the cumulative translation adjustment in the statement of financial position. For Table 1, the RRP projections were converted to USD using the foreign exchange rates assumed in the financial model for each year.

7 Average electricity price per kWh: 2013-₱6.12; 2014-₱4.90; 2015-₱3.83; 2016-₱2.95; 2017-₱3.35. 8 Information about the FIT-All rates was provided by Dinna Dizon, Manager-Compliance Management Department,

FIT-All Fund Administrator, Transco, during a meeting on 7 June 2019.

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receivables from Transco reached $31.7 million and at the same time the debt service coverage ratio dropped to 0.7x. With the improvement in the FIT-All fund’s liquidity, EBWPC’s receivables from Transco have now been reduced to approximately $10.0 million (60 days receivable) during the first quarter of 2019, and its debt service coverage ratio recovered to 2.1x in 2018. 12. ERC has acknowledged the protracted delay in confirmation of the FIT rate increases proposed by Transco annually, but has still not approved a price increase.9 The delay has been due to a change of commissioners in 2017 and a review of the methodology approved under the FIT rules, which, for example, allow a tariff adjustment for foreign exchange changes, regardless of the local currency contribution to a project’s cost. ERC is consulting stakeholders and experts on the proposed changes to the methodology for calculating the FIT rate increase and will update the data prior to presentation to the ERC commissioners. Two approaches are under consideration: (i) introduction of an individual tariff for each project based on its operating expenses, capital, and foreign exchange structure, or (ii) using a model project with the share of foreign exchange based on 60% foreign currency-denominated debt and a debt/equity ratio of 70/30. The latter was used in the calculation of the base FIT rate. Confirmation of the adjusted FIT rate is not expected until 2020.

II. EVALUATION

A. Project Rationale and Objectives

13. ADB’s participation in this financing is consistent with ADB’s Strategy 2020, which calls for ADB support to clean energy development to meet the growing energy demands in the region in a sustainable manner and a larger role for the private sector in infrastructure financing.10 The project, which uses wind energy, displaced coal-fired power plants that have greater greenhouse gas (GHG) emissions. It is also aligned with the Philippine country partnership strategy, 2011-2016, which prioritizes investments in renewable energy development and aims to help the country achieve high, inclusive and sustainable growth.11 The project is also consistent with ADB’s Energy Policy as it will result in increased dependable capacity from renewable energy resources, which will help ensure energy security and facilitate the transition to a low-carbon economy .12 B. Development Impact

1. Contributions to Private Sector Development and ADB’s Strategic Development Objectives

14. The successful financing of the project helped spur the development of more wind farm projects. After Burgos and Bangui Bay Wind Power Project with aggregate installed capacity of 201 MW, four more wind power projects with total capacity of 225 MW were developed in 2014 and 2015 and awarded FIT eligibility. Total wind power installed capacity has reached 427 MW, contributing to the country’s energy security. From the time of ADB’s participation in the

9 Transco has proposed the following FIT rates for the wind power operators included in the initial installation target

of 200 MW subject to ERC confirmation: 2016 – ₱8.9006/kWh; 2017 – ₱9.1869/kWh; 2018 – ₱9.5474/kWh; 2019 – ₱9.9808/kWh; and 2020 – ₱10.1887/kWh.

10 ADB. 2008. Strategy 2020. The Long-Term Strategic Framework of the Asian Development Bank, 2008-2020. Manila.

11 ADB. 2011. Country Partnership Strategy: Philippines, 2011-2016. Manila. 12 ADB. 2009. Energy Policy. Manila.

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financing until 2018, the project has delivered 1,321.5 GWh of electricity to the grid, translating into around 894,000 tons of carbon dioxide equivalent emissions avoided or an average of 223,500 tons per annum. The project also benefits the community in which it is located. As of end-2018, it has 35 full-time Filipino employees (26 men and 9 women). During the construction phase, the project generated 976 local jobs, including 928 through the contractors. The project also (i) benefited the local economy through the purchase of goods and services during construction, which amounted to ₱9.1 billion ($193.5 million), and (ii) provides livelihood programs, educational assistance, and environment-related projects in the local community.

2. Environment, Social, Health, and Safety Performance

a. Environment 15. The project was classified as category B for the environment. Since it was already under construction when ADB financing was considered, a compliance audit was undertaken and an Environmental and Social Action Plan was developed to address any non-compliance with the ADB Safeguard Policy Statement 2009. As of March 2017, all matters within the Environmental and Social Action Plan had been closed and the company had developed and implemented an effective Environmental and Social Management System. 16. An Initial Environmental Examination (IEE), with an associated Environmental Management Plan, was prepared as required for an environment category B project. The IEE covered the wind farm site including all turbines, access roads, two substations, and ancillary facilities. The IEE was publicly disclosed in January 2015. A separate IEE was developed for the 115-kV transmission line and temporary jetty, as this infrastructure was not included in the main report. The second IEE was finalized in July 2015. 17. Key potential environmental impacts during the operational phase were health and safety, noise, shadow flicker, bird and bat strike, as well as air quality, water quality, and waste management. The company has a target of zero incidents per year and has a clean health and safety record. Some exceedances of international standards for noise and shadow flicker have been recorded, but these are being managed and no grievances have been lodged by the community. Strike monitoring is conducted daily. Some common birds and fruit bats have been found on site, but no threatened or endangered species. The company also monitors air quality and water quality, and these are within limits. EBWPC is proactively managing the environmental risks of the project. The institutional systems, capacity, and commitment of EBWPC to manage the environmental impacts are deemed adequate. Details of the environmental impact are in Appendix 4.

b. Social Safeguards

18. The project was classified as category B for involuntary resettlement and category C for indigenous peoples under the ADB Safeguard Policy Statement 2009. The social compliance audit confirmed that the land acquisition process undertaken by EBWPC prior to ADB involvement complied with the national requirements. EBWPC has also incorporated in its environmental and social action plan measures and actions required by ADB to comply with the Safeguard Policy Statement with respect to involuntary resettlement. The project maintains a good relationship with its host communities through providing livelihood assistance to affected residents and legal advice to residents with outstanding land ownership issues. It also implements Corporate Social Responsibility projects, which include capability building programs for local government officials, adopt-a-school program, and health and sanitation projects. Of

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the current 156 individuals employed by EBWPC and its contractors, 112, including 19 females, are from the local communities. Through the Energy Regulations 1-94 (ER 1-94) benefit sharing program, the project has contributed at least ₱2.6 million to support the community-based projects of the host barangays (smallest administrative division in the Philippines), municipality, and province.13 Details of the project’s social impact are in Appendix 5.

3. Business Success 19. The project has demonstrated strong overall operating and financial performance through 2018, supported by favorable weather conditions. Notwithstanding the absence of any FIT rate increase, EBWPC remains profitable with a strong EBITDA—earnings before interest, taxes, depreciation, and amortization—and net profit margins, especially in 2017 and 2018. The company’s profitable operations translated into strong cash flow and liquidity despite the rise in FIT receivables from Transco. This is evidenced by its debt service coverage ratio of 1.4x in 2017 and 2.1x in 2018. The company was also able to pay out total cash dividends of $32.8 million in 2018. As of March 2019, the EBWPC collects its revenues on time and is now aligned with the two-month billing and collection cycle. Receivables from Transco have been substantially reduced to around $10.0 million for an acceptable level of 60 days receivable as of March 2019. The FIT-All fund now has surplus liquidity and, with the current approved FIT-All rate, Transco is confident that it will be able to cover all payables due to the eligible renewable energy operators. In addition, ERC is now taking up the recommended FIT rate increases and a FIT rate increase will likely be confirmed in 2020. Going forward, EBWPC’s profitability and cash generation are expected to remain stable and sufficient to cover maturing debt obligations. The sector overview is in Appendix 3. C. ADB Additionality

20. ADB provided guidance to EDC and EBWPC on the environment and social safeguards even when the project was still in the development stage. ADB’s participation also helped bridge the project’s financing gap. The other ECA and USD Commercial Debt facility lenders agreed to step up their commitments knowing that ADB’s approval was just delayed and it would eventually come in and assume part of their exposure on a pro rata basis. D. ADB Investment Profitability

21. Under the loan agreement, the interest margin received by ADB was approved by the Investment Committee and deemed appropriate for this kind of risk. EBWPC has been making principal and interest payments on schedule and, based on the updated projections, the borrower will continue to service debt on time until final maturity. It should also be noted that the debt is guaranteed by EDC and the guaranty is not expected to fall away until 2022. At the same time, an offshore debt service reserve account covering both scheduled principal and interest payments for the next six months is maintained with an offshore agent bank. ADB’s return on its investment would have been greater if it had been able to participate in the financing from the start and receive front-end and commitment fees.

13 The DOE promulgated ER 1-94 pursuant to Rule 29 of the Implementing Rules and Regulations (IRR) of EPIRA.

Under Rule 29, a generation company shall set aside one centavo per kilowatt-hour (₱0.01/kWh) of its total electricity sales as financial benefit of the host communities of the generation facility,

8

E. ADB Work Quality

22. Screening, appraisal, and structuring. EDC first approached ADB for potential financing of its wind farm project after passage of the Renewable Energy Act in 2008. Although ADB could not commit to any financing until the FIT rules and its implementing guidelines were in effect, the deal team provided guidance to EDC in addressing environmental and social safeguards matters relevant to a wind farm project. When the DOE released the FIT implementing guidelines and EDC started project construction, the deal team started processing the financing proposal for Board approval so ADB would be ready to participate in the refinancing of the project upon receipt of the COE. The deal team also worked with EDC and other potential lenders in crafting the financing terms. EDC, being a major player in the power generation sector and boasting a strong balance sheet, is deemed a prime client by most lenders. Thus, when ADB’s approval process was delayed, the other lenders were ready to step up to bridge the temporary financing gap. The deal team talked to the other lenders and secured their commitment to sell down to ADB on a pro rata basis once ADB received Board approval. Some lenders were already hesitant to sell down because the project was deemed to be a good asset, but the deal team was able to convince them to honor their commitment.

23. Monitoring and supervision. The deal team closely monitors EBWPC’s operating and financial performance through regular communication and follow-up on the timely submission of reports and financial statements. The company complied with all reporting requirements in a timely manner. ADB has also been prompt in giving its consent to waivers and requests for amendments of existing agreements and has also met with both ERC and Transco to gain a better understanding of the FIT implementation issues.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

24. The project’s favorable operating and financial performance through 2018 cannot be attributed to ERC and Transco. These government agencies would benefit from improving their process in approving the FIT-All and FIT rate escalation to gain the confidence of debt and equity investors, especially for new projects. Such action is vital to support the eligible renewable energy operators and ensure the success of their projects as well as the government’s program to increase the share of renewable energy in the country’s power generation mix. A coordinated institutional effort is recommended to convey ADB’s concerns to the appropriate government officials. The deal team must maintain regular communication with both ERC and Transco. 25. The ERC is conducting a review of the methodology approved under the FIT Rules, which, for example, allows tariff adjustments for foreign exchange changes regardless of the local currency contribution to a project’s cost. ERC has started to discuss and evaluate with stakeholders and experts the proposed changes to the methodology in calculating the FIT rate increase and to update the data prior to presentation to the ERC commissioners. 26. ADB’s participation in the financing was delayed and put at risk because of the Investment Committee’s requirement to post the project’s safeguard documents on the ADB website. EDC did not agree to this condition because of the confidential information in the documents and the stiff competition for FIT eligibility. The sponsor was willing to do it after securing FIT eligibility. The Investment Committee should have considered the situation and made an exception. The documents were disclosed to ADB in the first place and no issues were

9

identified. As a result, ADB’s participation in the financing was delayed by a year and ADB also missed out on the front-end and commitment fees payable to the lenders. 27. Transmission line congestion is a major challenge to renewable energy developers in the Philippines as key stakeholders do not yet have capacity to manage significant percentages of intermittent supply. ADB could consider (i) screening grid reliability (independently from the regulator) for renewable energy projects, and (ii) undertaking potential programs with key stakeholders in building the capacity to manage higher shares of intermittent supply, including grid-scale energy storage options. B. Recommendations and Follow-Up Actions

28. The deal team should maintain regular contact with the ERC and Transco and get updates on the approval of FIT rate increases. The deal team could also coordinate with the Southeast Asia Regional Department (SERD) in approaching the relevant Philippine Government officials to discuss ADB’s concerns with respect to FIT implementation.

10 Appendix 1

PROJECT-RELATED DATA

Table A1.1: Investment Identification 1. Country Philippines 2. 3.

Project Number Loan Number

P48325 3246

4. Type of Business Wind power generation 5. Project Title 150 MW Wind Farm Project 6. Investee Company and/or Borrower EDC Burgos Wind Power Corporation 7. Amount of Approved ADB Assistance $20.00 million

Table A1.2: Investment Data

1. Concept Clearance Approval 28 July 2014 2. Date of Board Approval 26 January 2015 3. Signing Date of Accession Agreements 10 November 2015 4. Date of Loan Effectiveness 10 November 2015 5. Amount and Date of Initial Disbursement

ECA Debt Facility USD Commercial Debt Facility

15 December 2015 15 December 2015

Table A1.3: Summary of Project Cost and Funding Sources RRP Amount

($ million) Actual Amount

($ million) Share of Total

(%) Project Cost

Pre-development Expenses 13.8 13.8 3.1 Land and ROW Expenses 5.9 5.9 1.3 Developer’s Fee 10.3 10.3 2.3 Power Plant Construction 350.6 350.6 77.9 Substation Construction 15.4 15.4 3.4 Transmission Line Construction 17.1 17.1 3.8 Construction Related Expenses 18.0 18.0 4.0 Construction Insurance 2.3 2.3 0.5 Financing Costs 27.6 16.6 3.7 Total Project Cost 461.0 450.0 100.0

Sources of Funds Equity 138.3 135.0 30.0 Debt ADB Direct Loan 20.0 ECA Debt Facility 155.2 150.0 33.3 USD Commercial Debt Facility 18.8 37.5 8.3 Peso Commercial Debt Facility 128.7 127.5 28,3

Total Debt 322.7 315.0 70.0 Total Sources of Funds 461.0 450.0 100.0

Source: ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to EDC

Burgos Wind Power Corporation 150-Megawatt Burgos Wind Farm Project (Philippines). Manila.

Appendix 2 11

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—INFRASTRUCTURE

Results area Actual achievements Justification Potential future achievements

1. Within company PSD effects

1.1 Improved skills. New or strengthened strategic, managerial, operational, technical or financial skills

Developed stronger engagement skills with landowners in the land acquisition process Capacity building of inhouse employees Undertook CSR activities like capability building program for local government officials and staff, adopt-a-school program, and health and sanitation projects

EBWPC implemented measures to gather and address landowners’ concerns and provided consistent legal assistance for landowners with land ownership issues. Inhouse employees are also being trained by Vestas and First Balfour. EBWPC staff also made strides in CSR activities and the public consultation process.

Continuous engagement with affected landowners and resolution of the remaining 93 lots involving unsecured land with expropriation cases

1.2 Improved business operations. Improved ways to operate the business and compete, as seen in investee operational performance against relevant best industry benchmarks or standards

Strong profitability and stable cash flows despite the absence of a FIT rate increase

O&M contracts with Vestas and First Balfour ensure smooth operation of the plant and transmission line.

Contracts are expected to be renewed. Nonetheless, inhouse employees are also being trained by Vestas and First Balfour.

1.3 Improved governance. As evident in set standards related to corporate governance, stakeholder relations, EHS fields, and/or energy conservation, and their implementation

Built stronger stakeholder relations with the host communities and affected landowners Livelihood restoration plan implemented to mitigate the impacts on affected and economically vulnerable households and monitored consistently CSR programs implemented in partnership with the barangay, municipal, and provincial LGUs of the host communities

Effective implementation of grievance redress mechanism and stakeholder engagement plan Ten economically vulnerable households were compensated through the livelihood restoration plan. To date, 5 households have realized benefits since its implementation in 2016. ₱18,766,961.66 has already been spent on CSR programs since 2014, primarily benefiting the communities of barangays Saoit, Nagsurot, and Poblacion. Implemented capability building program for LGU

Close the remaining community grievances recorded in the grievance log. Widen the scope of existing community engagement activities: conduct community-wide consultations at least once a year for each of the 3 host barangays encompassing the wind farm, in addition to the regular consultation with the LGUs. Improve the existing monitoring system to include information on whether the status of affected poor and vulnerable households has

12 Appendix 2

Results area Actual achievements Justification Potential future achievements

officials and staff, adopt-a-school program, livelihood and human resource training programs, and health and sanitation projects.

improved to at least national minimum standards. Continuously implement CSR programs and strengthen measures to ensure the sustainability of the projects.

1.4 Innovation. New or improved infrastructure design, technology, and service delivery; ways to cover or contain costs, manage demand or optimize utilization; improved risk allocation between private companies and government; financial structure, etc.

O&M contracts with Vestas and First Balfour ensured proper operation of the project and risk allocation / mitigation.

Vestas and First Balfour possess the needed expertise to operate and maintain the power plant and transmission line.

EBWPC is expected to renew the O&M contracts.

1.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the company

$315 million syndicated debt financing successfully raised to refinance project cost

Local and international financial institutions participated in the financing. The project was the first to be granted FIT eligibility and benefits from a strong sponsor.

The project’s strong operating and financial performance ensures timely repayment of project debt.

2. Beyond company PSD effects

2.1 Private sector expansion. Contribution by a pioneering or low-profile project that facilitates in its own right, or paves the way for, more private participation in the sector and economy at large

Total installed capacity of FIT eligible wind farm projects up to 427 MW

ERC’s implementation of FIT guidelines encouraged more developers to pursue development of renewable energy projects.

The DOE continues to underscore the need for more renewable energy sources in support of its fuel diversification. Up to 17,000 MW of additional renewable energy capacity are targeted through 2020.

2.2 Competition. Contribution of new competition pressure on public and other sector players to raise efficiency and improve access and service levels in the industry

Lower energy cost as evidenced by a decline in the WESM spot rate Reliable capacity

New coal-fired plants to come onstream are more efficient and environment friendly. New renewable energy plants are not expected to benefit from FIT or, if ever, lower FIT rates.

New generating capacity is expected to come onstream in the next 5 years.

2.3 Demonstration effects. Adoption of new skills, improved infrastructure assets and services, more efficient processes, maintenance regimes, improved standards, risk allocation and mitigation beyond the project company

High production efficiencies Renewable energy projects, especially wind farms, generating power close to the P50 level. O&M contracts with vendors promote greater operating efficiency.

EBWPC is expected to extend its O&M contract with Vestas to ensure operating efficiency.

2.4 Linkages. Relative to ER 1-94 remittance and engagement with the As of March 2019, While waiting for

Appendix 2 13

Results area Actual achievements Justification Potential future achievements

investments, the project contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries etc. in support of growth.

LGUs in processing claims ₱5,252,800 had been remitted to DOE. EBWPC conducted a series of orientation programs to the LGUs on the mechanics to claim benefits from ER 1-94 and assisted the LGUs in preparing documentary requirements to process claims.

DOE’s policy issuance on claim processing, continue to provide assistance in preparing the required documents. Once claims are being processed, monitor progress and extend the necessary technical support for the implementation of LGU plans and programs.

2.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the sector (beyond the company) through pioneering or catalytic finance

Power projects continue to receive financing support from local and international banks.

The strong liquidity of domestic banks allows them to provide longer term financing and offer terms competitive with the international banks. ECA-guaranteed facilities help attract more international banks to participate in the financing similar to EBWPC’s financing structure.

Local banks have been aggressive and lead the financing of new power generation facilities.

2.6. Affected laws, frameworks, regulation. Contributes to improved laws and sector regulation for PPPs, concessions, joint ventures, and build-operate-transfer projects; and liberalizing markets as applicable for improved sector efficiency

The project demonstrated the financial viability and sustainability of investing in a renewable energy project.

Implementation of the FIT Rules encouraged more renewable energy developers to pursue projects. Government agencies like ERC need to be more pro-active in the implementation process.

The Philippines needs more new power generating capacity to address increasing demand and replace old power plants. The DOE is expected to promote a more favorable regulatory environment to incentivize power developers.

3. Contribution to other ADB strategic objectives

3.1 Sector development outputs. Contribution to other sector development outputs and outcomes not captured under point 2, such as capacity or network expansion

Total dependable capacity increased to 21,241 MW as of December 2018 with solar and wind accounting for 740 MW and 427 MW, respectively.

Power sector continues to benefit from government support.

Up to 17,000 MW of additional renewable energy capacity are targeted through 2020.

3.2 Sector development outcomes. Contribution to other sector development outputs and outcomes not captured under point 2, such as increased infrastructure utilization or consumption, improved in-country connectivity, improved energy security

Improved energy security for the Philippines Gross power generation nationwide reached 99,765 GWh in 2018.

An offshoot of continued government support

Increased installed power generating capacity with continued support from the government

14 Appendix 2

Results area Actual achievements Justification Potential future achievements

3.3 Inclusion. Improved access to, availability or affordability of infrastructure services for the poor and other disadvantaged groups

Increased dependable capacity is helping to avert power outages. Solar power is being used in rural areas not connected to the grid.

Reduced cost of solar panels makes it the energy source of choice for off-grid areas.

Continued government support is expected.

3.4 Job creation. Creation of additional sustainable jobs or self-employment; distinguish between jobs created within and beyond the company

The project provided employment opportunities and prioritized hiring of local residents.

EBWPC and its contractors currently employ 156 individuals on-site, of which 72% are from the local communities. A lady engineer from the municipality of Burgos was employed in early 2019 and was deployed in the technical team. During construction, 976 workers were hired. Human resource training was conducted for 140 out-of-school youths and most were hired during project construction.

Continue to employ local residents for technical positions and skill-based jobs. Monitor if contractors are informing the direct impact barangays about the jobs available for hiring. Intensify job postings in village information centers such as the barangay halls and barangay health centers.

3.5 Environmental sustainability. Project net impact on GHG emissions; any other contributions to environmental improvements

Renewable energy production offsets the need for non-renewable energy generation, thereby reducing GHG emissions. The company has planted indigenous trees to mitigate and offset the impacts of vegetation clearance during construction.

The project has delivered a total of 1,321.5 GWh of electricity to the grid and this translates to around 894,000 tons of carbon dioxide (CO2) equivalent emissions avoided. In 2017 alone, the project’s operation avoided 369,487 tons of CO2 equivalent emissions. EBWPC has adopted 1,738.66 hectares of DENR National Greening Program areas for restoration. To date, the company has assisted with the planting of 790,980 indigenous seedlings. They are also partnering with local schools as part of the BINHI Green Legacy Program.

The reduction in GHG emissions will continue for the life of the project. The company is seeking certification from DENR that the restoration work is complete and permit requirements have been met. The company may choose to continue the BINHI Progam as Community Social Responsibility.

3.6 Regional integration. Project contributions to regional cooperation and integration by facilitating trade, cross-border mobility, cross-border power supplies, etc.

N/A

4. Overall Ratingb

Appendix 3 15

SECTOR OVERVIEW

A. Generating Capacity and Sources 1. As of 31 December 2018, the Philippines has total installed power generating capacity of 23,815 MW, but only 21,241 MW or 89.2% of total capacity is dependable. Fossil fuel remains the dominant source, with coal- and oil-fired power plants accounting for 37.1% and 18.0%, respectively, of installed capacity nationwide. Renewable energy, including geothermal and hydro, accounts for 30.3% of total installed capacity. Gross power generation nationwide reached 99,765 GWh in 2018. Fossil fuel-based plants accounted for 76.6% while renewable energy contributed 23.4%.

Table A3.1: Generation Mix in the Philippines, 2018

Fuel Source Installed Capacity Dependable Capacity Electricity Generation MW % MW % GWh %

Fossil Fuel Coal 8,844 37.1 8,368 39.4 51,932 52.0 Oil Based 4.292 18.0 2,995 14.1 3,173 3.2 Natural Gas 3,453 14.5 3,286 15.5 21,334 21.4 Total Fossil Fuel 16,589 69.7 14,649 69.0 76,439 76.6 Renewable Energy Geothermal 1,944 8.1 1,770 8.3 10,435 10.5 Hydro 3,700 15.5 3,473 16.3 9,384 9.4 Wind 427 1.8 427 2.0 1,153 1.2 Solar 896 3.8 740 3.5 1,249 1.2 Biomass 258 1.1 182 0.9 1,105 1.1 Total Renewable Energy 7,226 30.3 6,592 31.0 23,326 23.4

Total 23,815 100.0 21,241 100.0 99,765 100.0 Source: Department of Energy. 2019. 2018 Power Statistics. Manila.

B. The Luzon Grid

2. The Philippine electrical power grid is divided into three grids: Luzon (Northern Philippines), Visayas (Central Philippines), and Mindanao (Southern Philippines). The Luzon grid (location of the 150-Megawatt Burgos Wind Farm Project) is the largest with 16,550 MW of installed capacity (69.5% of the total); dependable capacity is 14,973 MW—90.5% of total installed capacity. Peak power demand growth in the Luzon grid is expected to grow by 4% in 2019 to 11.2 GW from 10.8 GW in 2018. Power demand is expected to surge on the back of economic growth and a population increase. The country’s infrastructure program is contributing to the growth in demand for electricity. The looming power shortage in Luzon is expected to exacerbate in 2024 when the country’s indigenous natural gas production from its Malampaya offshore well in Palawan falls significantly short of the gas requirement to run the three gas-powered plants in Batangas with aggregate installed capacity of 2,880 MW. Nearly a quarter of the electricity requirement of Luzon is sourced from these power plants.1 3. To address the looming power shortage, additional generation capacity needs to be installed as soon as possible. The DOE estimates approximately 10,000 MW of new capacity must be in place by 2022. The DOE also estimates that the country will need to triple the

1 ADB. 2018. Philippines Energy Sector Assessment, Strategy, and Road Map. Manila.

16 Appendix 3

existing installed generation capacity of 23,000 MW by 2040 to meet the country’s anticipated energy needs and increase reserve margins. 4. Currently, two coal-fired plants with aggregate capacity of 1,200 MW are expected to come onstream in 2019-2020. New projects with total capacity of 6,329 MW have been approved and an additional 33,199 MW are subject to review. Although the intermittent nature of power supply generated by renewable energy, particularly wind and solar, will not be a major factor in addressing the supply problem, the DOE continues to underscore the need for more renewable energy sources in support of its fuel diversification platform and the United Nations Sustainable Energy for All initiative. Up to 17,000 MW of additional renewable energy capacity are targeted through 2020, broken down as follows: hydro – 10,792 MW; solar – 4,081 MW; wind – 1,039 MW; geothermal – 684 MW; biomass – 326 MW; and ocean – 26 MW.2 C. Regulatory Issues 5. Inaction by government agencies, specifically the Energy Regulatory Commission (ERC), in approving new power projects is not helping the sector. For example, at least seven power supply agreements filed by Manila Electric Company with the ERC since 2016 still await approval. The ERC had a management vacuum when President Rodrigo Duterte suspended four commissioners in 2016-2017, with two of them eventually resigning. New commissioners have been appointed but they still need to study the issues, which has led to further delay in approvals. 6. The management vacuum in ERC has also adversely affected the operating feed-in-tariff (FIT) eligible renewable energy projects. Under the FIT Rules, the FIT rates are subject to annual increases benchmarked on foreign exchange and inflation starting 2016. The National Transmission Corporation (Transco) recommends the annual rate increase subject to ERC confirmation prior to implementation. However, the ERC has yet to approve any FIT rate increase. ERC is currently discussing with stakeholders proposed changes in the calculation of the FIT rate increase and, once updated data have been collected, a presentation to the ERC commissioners will be scheduled. No rate escalation may be expected until 2020.

2 Department of Energy. 2018. Philippine Energy Plan 2017-2040: Sectoral Plans and Roadmaps. Manila.

Appendix 4 17

ENVIRONMENTAL IMPACT A. Background 1. The Burgos Wind Farm Project involves the construction and operation of a 150 MW wind farm in Burgos, Ilocos Norte, by the EDC Burgos Wind Power Company (EBWPC). The project has 50 wind turbines, each with a capacity of 3.0 MW, along with a substation and ancillary facilities. A 115-kV transmission line of 43 kilometers (km) in length was constructed to convey the electricity from the site to the national grid via an existing substation located in Laoag City, Ilocos Norte. 2. The components of the project are:

(i) Installation of 50 x 3.0 MW wind turbine generators and ancillary plant equipment; (ii) Construction of a 115-kV transmission line, 43 kilometers (km) in length with 128

lattice-type transmission towers and 20 steel poles; (iii) Construction of a substation in Burgos and the expansion of an existing

substation in Laoag City, Ilocos Norte; and (iv) Construction of a temporary jetty for the transport of materials during construction.

3. Construction of the project was undertaken in two phases. The first phase consisted of the installation of 29 wind turbines with a generation capacity of 87 MW, and the construction of the transmission line and substation. Phase 2 consisted of the installation of an additional 21 turbines with a generation capacity of 63 MW. The 150 MW project was commissioned in November 2014, prior to receiving ADB approval and financing in January 2015. 4. The project was classified as category B for environment under the ADB Safeguard Policy Statement 2009 (SPS). Since the project was already under construction when ADB financing was considered, a compliance audit was undertaken. An Environmental and Social Action Plan (ESAP) was developed and agreed by ADB and EBWPC to address any non-compliance issues that were identified. 5. An Initial Environmental Examination (IEE) was prepared as required for an environment category B project. The IEE covered the wind farm site including all turbines, access roads, two substations, and the ancillary facilities. The IEE was publicly disclosed in January 2015. A separate IEE was developed for the transmission line and temporary jetty, in accordance with ESAP requirements, as this infrastructure was not included in the main report. The second IEE was finalized in July 2015. B. Mission Review Findings

1. Environmental Capacity 6. EBWPC has an Environmental and Social Management System (ESMS) to manage safeguards issues. The ESMS covers nine topics: policy; identification of risks and impacts; management programs; organizational capacity and competency; emergency preparedness and response; stakeholder engagement; external communications and grievance mechanisms; ongoing reporting to affected communities; and monitoring and review. 7. The ESMS Compliance Monitoring Team comprises the site manager, pollution control officer, environment technician, and a community relations officer. These personnel together

18 Appendix 4

ensure compliance with regulatory permits, lenders’ requirements, and implementation of the ESMS.

2. Compliance with Government Permits 8. The project has been granted several environmental permits pursuant to regulatory requirements from the Department of Energy (DOE) and the Department of Environment and Natural Resources (DENR). This includes an Environmental Compliance Certificate (ECC) for the wind farm; a Certificate of Non-Coverage for the transmission line, substations, and jetty; permits to operate; forest land use agreements; tree cutting permits; and hazardous waste permits. 9. A wind energy service contract was issued by the DOE to EBWPC on 14 September 2009 to develop the Burgos Wind Project in Ilocos Norte. The contract (DOE Certificate of Registration No. WESC 2009-09-004) is valid for 25 years or until 2034, and is renewable for another 25 years. 10. The first ECC for the project was granted by the DENR on 5 May 2000 (ECC-Ref No. 010005-05-0013-0302). This was for the initial 42-MW North Luzon Wind Power Project. On 13 August 2002, the ECC for the next phase was issued for the 80-MW North Luzon Wind Power Project (ECC Ref No. 010208-13n0030-1405). In 2008, the two ECCs were amended by merging them to reflect the larger rating capacities of up to 2.5 MW for each wind turbine. The amended ECC was issued to EBWPC on 6 September 2010. Finally, in 2013, an ECC amendment application was filed to reflect the potential 165-MW operation with 3.0 MW wind turbines. The amended ECC was issued on 8 July 2013. 11. The Energy Regulatory Commission (ERC) issued the provisional authority to operate the Burgos Wind Project on 18 December 2014. 12. The transmission line, substations, and temporary jetty were issued with Certificates of Non-Coverage by the DENR between 2010 and 2013. The Certificate of Non-Coverage means that the proposed project is not covered by the Philippine Environmental Impact Assessment System, and therefore, the proponent is not required to secure an ECC prior to commencement of operation.

3. Environmental Issues and Impacts 13. Since ADB approval and funding was provided after completion of construction, environmental issues and impacts to be managed largely relate to the operations phase. The key issues are summarized below. 14. Health and Safety. The company proactively manages health and safety, and has a target of zero incidents per year. This has resulted in a clean health and safety record for both EBWPC and contractors. Since project approval in 2015, there have been no fatalities or lost-time injuries. The last incident was a hand injury sustained in June 26, 2014. 15. Air Quality. EBWPC conducts annual emissions testing for the back-up generators located at the wind farm. This testing is conducted by an independent third party. The emissions comply with national emission standards.

Appendix 4 19

16. EBWPC calculates the greenhouse gas emissions (GHG) of its activities. The quantification methodology is based on the World Resources Institute’s Greenhouse Gas Protocol and the Intergovernmental Panel on Climate Change’s National GHG Inventories Reporting Instructions. The operation of the wind farm offsets the need for alternative, non-renewable power generation. Therefore, EBWPC is able to avoid the emission of around 223,500 tons of carbon dioxide into the atmosphere each year. 17. Water Quality. Water quality is monitored at four locations surrounding the site. During preventive maintenance activities, water quality is monitored for oil and grease discharges (a larger suite of parameters was monitored during construction). Results have so far indicated no contaminated discharges from the site. 18. Turbine Noise. Noise monitoring is conducted monthly at seven locations on the edge of the wind farm. During low wind speeds there are no exceedances in noise standards.1 However, during high wind speeds, exceedances have been detected. This is purportedly due to environmental sources such as rustling trees, insects, animals, people, and vehicles. During the Extended Annual Review Report (XARR) mission in 2019, it was noted that some monitoring sites may be located too close to turbines and may not accurately reflect noise levels at the nearest receptor. Nevertheless, at least some short-term exceedances in noise levels caused by the wind turbines appear likely. Monitoring for a longer duration may provide more accurate results. Importantly, no community grievances have been received in relation to turbine noise. EBWPC is conducting further studies on noise and on potential mitigating measures. 19. Shadow Flicker. The IEE predicted that shadow flicker could be a problem for between 38 and 57 households in the vicinity of the wind farm, and proposed community education, monitoring, and, if necessary, mitigation measures. 20. In 2015, EBWPC commenced community consultation on shadow flicker including distributing project information leaflets and providing information at local barangay halls. During May and June 2015, a survey of 30 households located closest to the wind farm was conducted. As a result of the survey, 7 out of the 30 households were found to be experiencing shadow flicker for a maximum of 1 hour a day during sunrise. This potentially exceeds guideline values, such as the World Bank Group Environmental, Health and Safety Guidelines, which recommends no more than 30 hours of shadow flicker per year and up to 30 minutes per day.2 However, consultation with villagers indicates that it is not considered a nuisance and no grievances have been raised. 21. Vegetation Clearance. The project is located within natural habitat and modified habitats. It is not located within critical habitat. EBWPC holds a Tree Cutting Permit from DENR to allow the clearance of vegetation. It also holds forest land use agreements covering 219 hectares of public forest land for the wind farm and 22.37 hectares for transmission alignment. Around 100,000 m3 of earthworks was conducted during the construction of access roads, turbines, and transmission towers, which included the clearance of native vegetation. 22. EBWPC has conducted both on-site and off-site replanting to mitigate for the clearance of vegetation during construction. On-site replanting was not very successful because of the

1 As per the World Bank Group Environmental, Health and Safety Guidelines (2007). 2 World Bank Group (2015) Environmental, Health, and Safety Guidelines for Wind Energy. World Bank Group,

Washington.

20 Appendix 4

poor soil and harsh coastal conditions, along with grazing cows, horses, and goats on site. Off-site, EBWPC adopted 1,738.66 hectares of DENR National Greening Program areas for restoration. To date, the company has assisted with the planting of 790,980 indigenous seedlings over three years. The company is awaiting a certificate from the DENR to confirm successful completion of the replanting program in compliance with their Tree Cutting Permit. 23. EBWPC also joined the BINHI Green Legacy Program in August 2017. BINHI is the nationwide greening program of the Philippines Energy Development Corporation. The aim is to restore denuded forests and to rescue and secure 96 of the most threatened Philippine tree species. In 2017, a tree planting activity was initiated with 14 partner schools in Burgos and Pasuquin, Ilocos Norte, with additional schools engaged in 2018. 24. Bird and Bat Strike. Bird and bat strike monitoring is conducted daily as part of security patrols, with results reported quarterly to DENR. Since 2015, no threatened and/or endangered species have been found. 25. In 2017, one bird strike was recorded and three in 2018. Bats have been found in previous years. The species collected include Philippine dove (Streptopelia dusumieri), pink-necked green pigeon (Treron vernans), spotted dove (Spilopeli chinensis), cinnamon bittern (Ixobrychus cinnamomeus), common moran, and fruit bats. 26. Bird flight deflectors were installed in one section of the transmission line in May 2017. This is due to the presence of the Philippine duck (Anas luzonica), which is classified as vulnerable by the International Union for Conservation of Nature. 27. Waste Management. The wind farm site has a hazardous waste store. Solid and hazardous waste is collected by a third party registered with the DENR. The site also has a septic tank and oil/water separator for treatment of liquid waste. 28. Temporary Jetty. The jetty was constructed by EBWPC’s contractor First Balfour. The contractor also obtained all permits and approvals for the facility. This included a Special Tree Cutting Permit and Special Earth Balling Permit for the transplanting of 25 bantigue trees (Pemphis acidula). This coastal species is often collected from the wild for bonsai. 29. Consultation and Grievance Redress. EBWPC has established effective networks with local communities and regulatory stakeholders and carries out a range of Community Social Responsibility activities. The company has also implemented a Grievance Redress Mechanism. Further details of the social impacts are in Appendix 7. 30. Reporting. EBWPC prepares monitoring reports for DENR and quarterly operations reports for lenders. ADB has also been working with the company to prepare a stand-alone, annual Safeguards and Social Monitoring Report that covers environmental and social issues.

4. Environmental and Social Action Plan 31. The IEE found that the project is compliant with Philippine legislation, but identified some gaps between the project’s environmental and social assessment and management processes and the requirements of the 2009 ADB SPS. An ESAP was therefore prepared.

Appendix 4 21

32. As of March 2017, all matters within the ESAP were closed and it was confirmed that the company ESMS had been implemented to ensure ongoing management and continuous improvement throughout the operation phase of the project. C. Conclusion 33. EBWPC is committed to proactively managing the environmental risks of the project. The institutional capacity and commitment of EBWPC to manage the project’s environmental impacts are deemed adequate and generally in line with SPS requirements and international standards.

22 Appendix 5

SOCIAL IMPACT

A. Project Profile 1. The 150 MW Wind Farm Project of EDC Burgos Wind Power Corporation (EBWPC) involved (i) the installation of 50 3.0 MW wind turbine generators (WTGs) within the 618 hectare site located in barangays Saoit, Nagsurot, and Poblacion in the municipality of Burgos, Ilocos Norte; (ii) the construction of a substation with three transformers; and (iii) the construction of a 43 km 115 kV transmission line traversing 29 barangays within the municipalities of Burgos, Pasuquin, and Bacarra to connect to the nearest substation of the National Grid Corporation of the Philippines (NGCP) located in Laoag City, Ilocos Norte. 2. Financing was approved by the Asian Development Bank (ADB) on 26 January 2015. Since the land requirement for the project was secured by EBWPC in the early 2014, a third-party social compliance audit was undertaken during project processing. This assessed the past and present concerns related to the impacts on involuntary resettlement and indigenous peoples, in accordance with relevant national laws and ADB Safeguard Policy Statement, 2009 (SPS 2009). The social compliance audit report confirmed that the land acquisition process undertaken by EBWPC complied with the national requirements. The assessment results with respect to ADB requirements on involuntary resettlement included the following recommended actions: (i) formalize the establishment of a grievance mechanism and carry out wider dissemination to community residents and stakeholders; (ii) organize barangay level consultations to identify and resolve any outstanding issues on land rights acquisition; (iii) provide legal support to all land owners with outstanding land issues; (iv) conduct a socio-economic survey covering 33 households with material impacts; (v) implement a livelihood restoration plan for land owners with more than 10% of productive lands affected by the project; (vi) develop an action plan with the affected cattle-raisers occupying the pasture land within the wind farm site; and (vii) implement the Information, Education, and Communication (IEC) plan to ensure information disclosure and continued stakeholder engagement. These recommended actions were incorporated into the environmental and social action plan (ESAP) previously developed based on the environment and social due diligence conducted by other lenders. 3. The project was classified as category B for involuntary resettlement and category C for indigenous peoples under the ADB SPS. The project site is situated on both public and private lands with a total land area of 686 hectares. EBWPC’s rights to use the public land were covered by Forest Land Use Agreements issued by the Department of Environment and Natural Resources (DENR). For private lands, EBWPC avoided the acquisition of land titles and preferred to enter into lease contracts with the landowners or through writs-of-possession or orders of expropriation to lease using the Department of Energy’s (DOE) power of eminent domain. No ethnic groups or indigenous communities are present in the project sites and the project area is not within a legally recognized ancestral domain. B. Review Findings

1. Compliance with Social Safeguard Requirements

4. Involuntary Resettlement. The wind farm affected 280 privately-owned lots and EBWPC has acquired land use rights for 279 lots through lease agreements. The transmission line encompasses an aggregate land area of 121 hectares affecting 1,867 private lots, of which EBWPC has already entered into contracts of easements of right-of-way (CERW) with 1,769 landowners. Of the remaining 99 unsecured lots, 93 lots are being processed with expropriation

Appendix 5 23

cases and 6 lots are currently being reviewed for exclusion since the recent land survey confirmed that the project impacts are insignificant. Though EBWPC aimed to acquire land rights through negotiated settlement, 1,622 lots underwent expropriation proceedings because of land ownership issues. The Regional Court handling the expropriation cases established a composite team to determine just compensation. The team is comprised of the Plaintiff Commissioner, Municipal Assessors, and a representative from the local Bureau of Internal Revenue, who reviews current land use and valuation and conducts onsite assessment of the property. The land acquisition process for the project is covenanted in the Common Terms Deed, which also includes the registration of secured lots to appropriate land use instruments (LUI) and real estate mortgage (REM) registration.1 The LUIs for 1,331 lots have already been released and registered, while the LUIs for 138 lots have been submitted for registration. Once 90% of the secured lots are LUI registered, EBWPC may proceed to the processing of REM registration. Since most of the affected lots had outstanding land ownership issues, EBWPC consistently provides legal assistance for the preparation of necessary legal documents and notarization through the engagement of a local lawyer. EBWPC also established a Grievance Redress Mechanism (GRM) coupled with intensive IEC activities to gather and address the concerns of lot owners and affected communities. 5. The impact of the project on the cattle-raisers previously utilizing the lots within the wind farm were mitigated by EBWPC through continuous engagement with the Burgos Agri-Business Association (BABA). While BABA members were allowed to continuously use the area, a series of planning workshops and trainings to improve the practices and capacity of BABA members were conducted. The feedlot system for cattle fattening was introduced as an alternative to open grazing; however, despite the introduction of this alternative, BABA members still prefer the traditional way of grazing after realizing that the presence of wind turbines did not have negative impacts on their livestock and that their cattle are safer inside the wind farm because of the security measures imposed by EBWPC.2 The association also received 5 cattle for in-breeding to support the livelihood of its members. BABA established a livelihood project of cattle in-breeding, which still provides benefits to its members. 6. A survey to determine economically vulnerable affected persons within the transmission line was conducted by EBWPC. From the 33 households identified with material impacts,11 households were initially assessed to lose more than 10% of their productive assets. A more thorough house-to-house survey was conducted to further assess the eligibility of the initially identified economically vulnerable households. Out of 11 households, only 10 were considered eligible because the excluded household was assessed to own several hectares of land producing 50 sacks of rice per cropping season, a tractor, and a public utility vehicle (jeepney and tricycle). A livelihood restoration plan (LRP) was developed by EBWPC in consultation with the vulnerable households and identified cattle dispersal and fattening as the most suitable project, since the households were mainly engaged in agricultural activities and livestock production. The distribution of cattle was completed within 2016 and a Memorandum of Agreement between EBWPC and the LRP beneficiaries was executed, defining the rules and responsibilities of both parties to ensure the sustainability of the project. To date, 5 households have already realized benefits from the LRP. EBWPC continuously conducts monitoring activities to record progress and to gather the concerns of the beneficiaries. The status of implementation is being reported to ADB.

1 Section 2.3 (Perfection of Land Security) of the Common Terms Deed between the Transaction Parties and Finance Parties dated 17 October 2014, as amended. 2 Interview with Mr. Oscar Baniaga, an officer of BABA, during the review mission.

24 Appendix 5

7. Indigenous Peoples. The project area encompassing the wind farm and the transmission lines is not within a declared ancestral domain area and did not entail impacts on any indigenous peoples’ communities.

2. Other Social Dimensions 8. Community Engagement. Based on the Stakeholder Engagement Plan (SEP), intensive IEC activities were conducted in 2015-2017. These focused on the affected landowners for land acquisition and on the host communities for environment-related concerns. At present, an open line of communication has been established with the host communities’ local government units (LGUs) and engagement with the landowners is on an as-needed basis. The CSR team often meets with the barangay councils of direct impact communities to discuss plans and implementation of CSR programs. At the municipal level, CSR-related activities are the focus of consultations and discussions with the line departments. Engagements with the barangays traversing the transmission line are being undertaken as the need arises, but the land team and the right-of-way (ROW) patrollers are frequently in touch with them. The CSR team maintains a stakeholder engagement record, which has logged IEC activities conducted since February 2015. 9. External Grievance Mechanism. This mechanism is also included in the SEP. All employees are aware of the responsibility to receive community concerns, but the assigned responsible groups are the CSR team, land team, environment and watershed management team, security team, safety team, and ROW patrol. Concerns from the communities are being gathered through SMS, e-mail, accomplished grievance forms, or verbal reporting. A grievance log sheet maintained by the CSR team records concerns raised since October 2014. Though EBWPC aims to promptly resolve concerns as soon as possible, the grievance log contains 11 outstanding issues received in 2015-2016, of which 6 were contractor-related concerns and 5 were land acquisition concerns on boundaries and legal ownership. During the review mission, interviews with the surrounding communities confirmed that EBWPC has an open line of communication with the communities. 10. Labor and Working Conditions. EBWPC ensures compliance with the Philippine Labor Code and ADB’s social protection requirements. Recent inspection by the local labor regulatory agency confirmed that EBWPC has no violations on general labor standards, occupational safety and health standards, and social welfare benefits. The on-site human resource (HR) team monitors the compliance of contractors with the labor laws. EBWPC and its contractors provide benefits beyond the minimum requirements of the law such as provision of wages above the minimum wage, a rice allowance, and health insurance. EBWPC also implements a wellness program for its employees and conducts awareness-training programs on gender sensitivity and on the prevention of sexual harassment in the workplace. 11. EBWPC and its contractors currently employ 156 individuals on site, of which 112 are from the local communities. Only 19 females from the local communities are employed for the project, constituting 17% of total employment. During the construction phase, the project had a workforce of 976. 12. EBWPC adopts the HR policy of its parent company, Energy Development Corporation (EDC). Following the ESAP, the HR policy of EDC was updated to include provisions on compliance with the national laws as well as equal opportunities and non-discrimination in the workplace. While EBWPC is in the process of establishing an on-site HR policy, it has already

Appendix 5 25

developed its own Code of Conduct, which was disseminated to all employees. EBWPC has an established Internal Grievance Mechanism to solicit employment-related issues and concerns of its workers. The HR team maintains a grievance log of concerns and actions taken in resolving each concern. 13. Social Development and CSR. Through its CSR program, EBWPC has implemented projects that provide benefits to the local communities, including (i) capability building programs for LGU officials and staff on the development of a tourism plan, disaster risk reduction management, environmental sanitation, and solid waste management; (ii) an adopt-a-school program; and (iii) health and sanitation projects. Also, in partnership with the Provincial Government of Ilocos Norte and City Government of Laoag, EBWPC implemented livelihood training, human resource training, and a sanitation program. The livelihood training benefited 281 community residents, of which 220 were women. For the human resource training, 140 school youths were trained and most were hired during the project construction phase. From 2014 to 2018, EBWPC’s accumulated expenditures on CSR reached ₱18,766,961.66. 14. Project host communities will also derive benefits from the Energy Regulations 1-94 (ER 1-94) benefit sharing program. Community benefits from ER 1-94 are calculated based on 1 cent per kilowatt hour of electricity produced by EBWPC. The total accrued amount will be divided into 3 categories: 50% for the electrification fund; 25% for the development and livelihood fund (DLF); and the remaining 25% for the Reforestation, Watershed Management, Health and/or Environment Enhancement Fund (RWMHEEF). The electrification fund will be utilized for the electrification projects of DOE while the DLF and RWMHEEF will be used to support community-based projects of the host barangays, municipality, and province. As of March 2019, the DLF and RWHEEF has already accumulated P2,626,400. However, since the national regulatory agency is in the process of amending the policy, the processing of claims was temporarily put on hold. Pending the release of the enabling law, EBWPC conducted a series of discussions and training sessions for the LGUs of barangays Saoit, Nagsurot, and Poblacion, as well as the municipality of Burgos, to train them in project planning and the preparation of documentary requirements for the processing of their claims from the DLF and RWHEEF. C. Conclusion 15. EBWPC is committed to sustaining its accomplishments and improving the socio-economic benefits of affected and host communities, while at the same time ensuring that potential adverse impacts are addressed and mitigated. While the required activities in the ESAP have already been achieved, EBWPC continuously reports project updates to ADB on the status of land acquisition, implementation of the LRP, labor-related matters, stakeholder engagement activities, CSR programs and projects, as well as undertakings related to the processing of host communities’ claims from ER 1-94.